Economic Fallacies

You thought you could bet against the fed, the US consumer, the best and the brightest, the meritocracy and high-IQ and not be turned into roadkill?
You thought the incantations of doom and gloom from Zerohedge and Karl Denninger would supersede economic reality, HBD, and American exceptionalism? Oh how mistaken you were. For as far back as 2011, we’ve been telling readers to ignore the doom and gloom because all of these arguments for the why the economy is supposedly doomed are based on wishful thinking – a leftist desire to see the economy fail – not logic . How much higher will the market go? I know setting short-term targets tends to be a sucker’s game, but I’m looking at at least another 10% gain for the S&P 500 for 2015 and possibly another 50-75% by the end of the decade.

The most common errors of judgement by the left when predicting doom & gloom:

1. Fallacy of composition

The fallacy of composition is to make an inference about a large system based on a smaller component. This is best understood in regard to national versus household debt. The US government, unlike a household, is perpetual, so it can keep rolling its debt indefinitely, unlike an individual whose debt is discharged upon death. Another example is making an inference about a large system (the US economy) from a single data point (unemployment). In invoking the fallacy, if unemployment is high the entire economy must therefore be weak, for example.

2. Data taken out of context

Did you hear about the falling Baltic Dry Index? The economy is doomed, cuz, um, is! The Baltic Dry Index is useless in terms of forecasting and ascertaining the health of the global economy, and the actual empirical evidence suggests the economy is not stuck.

A two-tenths of a percent decline in durable goods, for example, is taken out of context by the attention-seeking media as being a sign of economic collapse when, in fact, such fluctuations are very common during economic expansions.

3. “This time is not different”

The left assumes historical patterns must always repeat (“It’s never different!”), but what if it really is different this time? Historically, every bull and bear market is different than the one that preceded it, in terms of the cause, duration, the chart patterns, leadership, etc.

4. Conflating sociology with macroeconomics

Typical liberal logic: “Stocks should go lower because wealth inequality is too high” “People are losing their jobs, so who is going to buy stuff?”

We’re becoming a nation of whiners and crybabies, channeling our personal frustrations and irrational anxieties unto our assessment of the economy. Markets are driven by data, such as profits & earnings, not egalitarianism. If the data is strong, markets will rally in spite of rising wealth inequality. Same for unemployment – a proliferation of low paying jobs and a low labor force participation rate doesn’t change the fact consumer spending is growing from sources such as the rich and foreign consumption. Consumer spending keeps rising in spite of rising wealth inequality. Business to business is booming. For the 6th year in a row, over two-thirds of companies on the S&P 500 have beaten earnings estimates.

5. A pundit said so

Liberals (to understand why Peter Schiff, Taleb and other fed bashers are liberal read this) like Peter Schiff, Karl, and Nicolas Nassim Taleb are broken clocks who should be ignored, or at least ridiculed for their ineptitude. For years, these libs have been beating the drums that the financial system is on the edge of collapse due to leverage, risks, blah, blah – to no avail. In attacking the fed and low taxes, the gloomers fail to realize is that pro-growth spending (tax cuts, defense) and aggressive monetary policy policy (QE, rate cuts) in a risk-averse, low-rate environment, such as the one we are in today, only has upside and no downside. The Bush tax cuts, for example, din’t cost anyone anything but helped the economy (how much is disputable). Same for the bank bailouts, which pretty much ended the crisis in one fell swoop and indirectly paid for itself in the perdurable economic and asset boom that followed. If the market were concerned about those things, such fears would be reflected in the bond market; however, rates are very low – long after the fed ended QE. Pundits like Schiff predicted that the end of the fed’s bond buying program would cause inflation, but the bond market actually surged in 2014. The reserve currency means the USA can spend its way out of recessions, with impunity.

Buy and hold beats waiting for the Black Swan that will never happen. Had you bought the S&P 500 at the very peak in 2007 you would would be up 30% today, versus someone who went to cash. If you sold stocks in 2011 and went to gold, at Peter Schiff’s recommendation, you would have not only missed a huge 70% rally in stocks, but you would be down 30% in gold. Terrible.